Calls in arrears are shown in the balance sheet as:

A deduction from the paid up capital

The correct answer is option 2- A deduction from the paid up capital.

Calls in arrears are shown in the balance sheet as a deduction from the paid up capital.

If shareholders fail to pay the call amount, the outstanding or unpaid calls become known as "calls in arrears."  When a company makes a call (e.g., first call, final call) on its shareholders, the amount becomes due. If some shareholders fail to pay, the unpaid amount is called "Calls in Arrears".

In the balance sheet (as per the Companies Act, 2013 – Schedule III), Calls in Arrears is shown as a deduction from the Subscribed but Not Fully Paid-Up Share Capital under the "Share Capital" section in Equity & Liabilities.